Volatility Returns to Crypto

Daily Updates:

As crypto markets currently experience a large sell-off we thought we’d share some charts to tell the story.

• President Trump said he sees “no reason” to meet Chinese President Xi Jinping after China announced a new rule of export controls on rare earths materials and critical minerals. Trump then threatened a “massive increase” in tariffs to the tune of an additional 100% against China 
• The renewed round of trade tensions between the US and China has exploded crypto, equity and bond markets concurrently while US treasuries and gold caught another bid (10-year treasury yields sank 11bps to 4.03%).
• The S&P 500 suffered its worst single day loss since the April tariff turmoil, plunging 2.7% while the Nasdaq 100 lost 3.5% – however, markets also saw speculation that the announcement triggered a correction in an already fragile rally in risk-on sentiment.

• BTC fell from $122K earlier today to a low of $105K only an hour ago and has quickly rebounded to $113K. 
• Ether has plunged 13% in the past 24 hours — from $4,400 to $3,500 and now just under $3,900. 

• Earlier in the day President Trump took to Truth Social, declaring that China has become “very hostile” and that “there is no way that China should be allowed to hold the World ‘captive’”. That was in reference to a new set of export controls imposed by the country on rare-earth materials and critical minerals. 
• He also added that there seemed to be “no reason” now to follow through with a planned meeting with China's leader, Xi Jinping. 
• Later, in another Truth Social post, Trump announced “the United States of America will impose a Tariff of 100% on China, over and above any Tariff that they are currently paying. Also on November 1st, we will impose Export Controls on any and all critical software.”

• Rare earth materials have been one of the focal points of the hostile tensions between the two sides, and once more is the cause for the brinkmanship. When Trump hiked tariffs on Chinese products back in April this year, the Chinese government cut off mineral exports to US companies — that was later reversed in a truce. Yesterday, China announced a new policy change that will require overseas exporters to obtain an export license for items that even have traces of certain rare earths, according to the Ministry of Commerce. Certain equipment and technology for processing rare earths and making magnets will also be subject to controls.
• Over the past 24 hours $8.99B in positions have been liquidated according to Coinglass — $7.53B of that has been long positions. That amounts to the largest liquidation of leveraged positions since April. 

• The tariff tensions have also proven to be the spark that lit the fuse for a massive outperformance in short-tenor BTC volatility. We’ve commented for months that BTC vol has been historically low — both in realised and implied. 

• As seen above, BTC’s term structure of volatility has inverted following a 30 vol point jump on one-week contracts over the past 24 hours. While still not close to levels seen earlier in the year, it nonetheless marks a big overnight move in options markets. 
• The renewed trade Cold War has not just affected the front end of the term structure either — the term structure of volatility has shifted up in a parallel manner as options traders now foresee far larger moves in BTC’s spot price over the short and long term. 

• Short-tenor volatility smiles have also turned significantly bearish. After holding a slight call skew midday earlier today, OTM puts now currently trade with a 11 vol point premium to call options at a similar moneyness. 
• That’s the lowest level of skew we’ve seen since the August selloff prior to Chair Powell’s Jackson Hole speech.